CERNOBBIO, Italy Italian government leaders expressed hope on Saturday that the fragile ruling coalition could avoid a breakdown that would threaten strained finances and risk wrecking the trust won during months of painful austerity.

"I am confident, I believe there won't be a crisis," Economy Minister Fabrizio Saccomanni told reporters on the sidelines of a business conference in the northern town of Cernobbio.

He warned that Italy risked a "totally unforgivable loss of credibility" if political turmoil disrupted efforts to keep its public deficit within European Union limits and renewed doubts about its budget stability.

There have been weeks of tension over the political future of centre-right leader Silvio Berlusconi after Italy's top court found him guilty of being at the centre of a vast tax fraud conspiracy at his Mediaset broadcasting empire.

Allies of the former premier have said they could pull out of Prime Minister Enrico Letta's unwieldy left-right coalition if centre-left members of a Senate panel vote to strip Berlusconi of his seat in the upper house of parliament.

However, senior allies of the 76-year-old media billionaire have struck a more conciliatory tone in the past two days, following a statement from President Giorgio Napolitano warning parties against provoking another crisis.

"The country needs responsibility. We have guaranteed this sense of responsibility today," Renato Schifani, the floor leader in the Senate of Berlusconi's People of Freedom (PDL) party, told SkyTG24 television.

The cross-party panel, in which the centre-left Democratic Party (PD) holds the largest number of seats, meets on Monday but it may take weeks for the complicated procedure that could lead to Berlusconi's expulsion from parliament to be completed.

Letta told the BBC in an interview that he was confident the government would now carry on.

But political risks have weighed on Italian government bonds in recent sessions and analysts say Rome may see weaker demand and be forced to pay higher yields at an auction next week if investors believe the government risks collapse.

A breakdown of the coalition, raising the prospect of early elections at a time when Italy should be planning next year's budget, would push yields on Italian government bonds further up, increasing debt payments, Saccomanni warned.

"Fresh tensions on government bonds would make it more difficult (for Italy) to manage the budget deficit and keep it within the 3 percent limit," he said.

COURT OF HUMAN RIGHTS

As the manoeuvring continued, Berlusconi's lawyers filed documents for an appeal to the European Court of Human Rights in Strasbourg to have the law under which he could be expelled from parliament declared invalid in his case.

The appeal says that the so-called "Severino law", which makes politicians convicted of serious offences ineligible for parliament, should not apply to Berlusconi because it was only passed last year, after the events over which he was convicted.

The centre-left Democratic Party has rebuffed PDL efforts to delay the Senate panel hearing while a separate appeal to Italy's constitutional court is heard, and party leaders appeared to rule out any accommodation.

"If anyone decides to pull the plug on the government if Silvio Berlusconi is declared ineligible as senator, they will have to take responsibility before the country and the international community," PD leader Guglielmo Epifani told a party conference in Genoa.

Berlusconi allies have accused the PD of colluding with what they call leftist magistrates to eliminate the media tycoon politically and say any crisis would be its fault.

The friction within the coalition, established after the inconclusive election in February that left no party able to form a government, has reawakened memories of 2011 when Italy came close to dragging the euro zone into a life-threatening crisis.

The euro zone's third largest economy is still stuck in its longest postwar recession and is facing rising headwinds as it fights to keep its deficit under the EU's limit of three percent of gross domestic product.

The main gauge of investor confidence, the risk premium demanded by investors for Italian 10 year government bonds over safer German Bunds, has crept up steadily although it is still well off the dramatic levels seen two years ago.

(Writing by Valentina Za; and James Mackenzie; editing by Mark Heinrich)

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